Inflation is termed as the taxation that we all have to bear. I will not get into the details of inflation and what causes it as that would take a detail explanation and shift focus off the topic at hand. Inflation is paying more for the same services than you were paying for, a month / 6 months / a year ago. If you pay 10% more for the same amount of goods than last year, effectively you have been taxed 10% extra this year by the Government. Hence inflation can also be seen as an unwritten tax. So the question arises, how do we hedge against inflation? How can we protect our savings from losing value?
An obvious advice would be to invest in assets that would appreciate at a rate higher than the rate at which inflation rises so would make your investment inflation proof – in essence hedge against inflation. There are several such investments I would like to comment on 3 specific assets - land / property, gold and treasury bonds. Now each of these assets has positive and negative aspects which make them useful in specific scenarios. I will try and touch upon each of these aspects. Firstly, let me discuss about land/property. This is an asset that never loses value and always appreciates so there is no downside to investing in land. The rate of appreciation is decent from measly 5% to 500% percent depending on the timing and location of investment. A rule of thumb in this regard would the value of property doubles every 3-5 years irrespective of the timing of investment. So this must be a terrific investment? Well, not quite. Land and property is a large investment and not affordable for everyone. If you are among those who cannot directly invest in the property market, try purchasing on margin or purchase a portfolio that invests in land and infrastructure, it is all the same. The only downside of active investment in land/ property would be the lack of liquidity and irrational market behavior. Land/ property is not easily liquefiable – meaning offloading it is a tedious legal process with too many commissions involved which might discourage frequent purchase and sale. However, there is not an asset that appreciates as quickly as land /property.
The next best asset in terms of appreciation would be gold. Gold is the precious metal that has always appreciated in value due to the limited quantity and unquenchable thirst of the buyers. In fact until a few decades ago, the value of a currency was derived by the amount of gold held by the country’s Federal Reserve. Gold / oil securities are still the most valued means of alternative investment in the face of global uncertainty. The uniqueness of gold/ oil securities is that irrespective if the global financial scenario or political scenario the demand for these never flag and hence their value always keeps growing. This is the most ideal investment for parking your money while you are not sure of a long term investment. It gives very high returns but is very volatile as well. The problem gold / oil are that you cannot have it as a long term investment option. Investors use gold to park the funds until the actual avenue opens up for investment. E.g. after the 2011 global debt crisis, investors all around the world pulled out investments from Euro Zone and invested in Gold and oil securities which continued till late 2013.
The last of the options is treasury bills. Treasury bills are the most secure form of investment as they have the sovereign country’s backing. Most of the long term treasury bills provide a decent return with zero risk –unless the sovereign country files for bankruptcy (E.g. Greece) which is a rare phenomenon. Most of these treasury bills are rated by independent rating agencies like Standard & Poor or Moody’s and they are based on the the yield and risk involved with the treasury bills. While US treasury is zero risk and low yield, maybe a Zimbabwe treasury bill is high yield and slightly higher at risk. All said and done, treasury is the least opted investment avenue mainly because it has the least ROI as compared to other investment options even though it is a good hedge against inflation. Investors who are risk averse mostly opt for treasury bills.
So long..
An obvious advice would be to invest in assets that would appreciate at a rate higher than the rate at which inflation rises so would make your investment inflation proof – in essence hedge against inflation. There are several such investments I would like to comment on 3 specific assets - land / property, gold and treasury bonds. Now each of these assets has positive and negative aspects which make them useful in specific scenarios. I will try and touch upon each of these aspects. Firstly, let me discuss about land/property. This is an asset that never loses value and always appreciates so there is no downside to investing in land. The rate of appreciation is decent from measly 5% to 500% percent depending on the timing and location of investment. A rule of thumb in this regard would the value of property doubles every 3-5 years irrespective of the timing of investment. So this must be a terrific investment? Well, not quite. Land and property is a large investment and not affordable for everyone. If you are among those who cannot directly invest in the property market, try purchasing on margin or purchase a portfolio that invests in land and infrastructure, it is all the same. The only downside of active investment in land/ property would be the lack of liquidity and irrational market behavior. Land/ property is not easily liquefiable – meaning offloading it is a tedious legal process with too many commissions involved which might discourage frequent purchase and sale. However, there is not an asset that appreciates as quickly as land /property.
The next best asset in terms of appreciation would be gold. Gold is the precious metal that has always appreciated in value due to the limited quantity and unquenchable thirst of the buyers. In fact until a few decades ago, the value of a currency was derived by the amount of gold held by the country’s Federal Reserve. Gold / oil securities are still the most valued means of alternative investment in the face of global uncertainty. The uniqueness of gold/ oil securities is that irrespective if the global financial scenario or political scenario the demand for these never flag and hence their value always keeps growing. This is the most ideal investment for parking your money while you are not sure of a long term investment. It gives very high returns but is very volatile as well. The problem gold / oil are that you cannot have it as a long term investment option. Investors use gold to park the funds until the actual avenue opens up for investment. E.g. after the 2011 global debt crisis, investors all around the world pulled out investments from Euro Zone and invested in Gold and oil securities which continued till late 2013.
The last of the options is treasury bills. Treasury bills are the most secure form of investment as they have the sovereign country’s backing. Most of the long term treasury bills provide a decent return with zero risk –unless the sovereign country files for bankruptcy (E.g. Greece) which is a rare phenomenon. Most of these treasury bills are rated by independent rating agencies like Standard & Poor or Moody’s and they are based on the the yield and risk involved with the treasury bills. While US treasury is zero risk and low yield, maybe a Zimbabwe treasury bill is high yield and slightly higher at risk. All said and done, treasury is the least opted investment avenue mainly because it has the least ROI as compared to other investment options even though it is a good hedge against inflation. Investors who are risk averse mostly opt for treasury bills.
So long..
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